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Effects of World War on Central 
and South America 



BY 



WALTER SCOTT PENFIELD 



Address delivered at the International Peace 
Congress, held at San Francisco 
October 10-13, 1915 



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Effects of World War on Central and 
South America 



It is unfortunate that International Peace Con- 
gresses do not interest the average business man to 
any appreciable extent. This is largely because his 
time is engrossed in commercial pursuits. If ques- 
tioned, he will admit that war is an abnormal state, 
causing great injury and entailing enormous economic 
loss. But, as a general rule, he will think of Peace 
Congresses as an aggregation of impractical indi- 
viduals engaged in the agreeable pastime of discussing 
theoretical problems in an abstract manner, without 
gaining any concrete result, unless it be in having 
passed concise resolutions reciting that war is an evil 
and ought, therefore, to be forever abolished. It is for 
this reason, as well as because the American business 
man is today more greatly interested than ever before 
in the development of trade and in the capturing of 
markets in the countries to the south of us, that I have 
selected as my topic "Effects of World War on Central 
and South America." 

One who has never studied carefully the commer- 
cial relations existing between Latin America and 
some of the present warring nations of Europe, and 
the economic dependence of the southern continent on 
Europe, would be likely to conclude that the countries 
of Latin America are independent economically, thriv- 
ing by trade among themselves. At least, it would be 
hard to conceive how these nations, located as they are 
thousands of miles from the seat of belligerent opera- 
tions, would be likely to suffer to any perceptible 
degree. 

But the statistics show the opposite to be true. The 
economic and financial depression produced in the civ- 

1 



ilized world by the gigantic war that at present dis- 
turbs Europe has made itself felt with especial force 
in the Iberian Republics. The export and import trade 
has fallen, and with it the customs revenues, from 
which Latin America draws almost entirely for the 
payment of governmental expense. With the diminish- 
ing of foreign commerce has come hand in hand the 
slackening of domestic trade. The supply of European 
made goods has been or is being rapidly exhausted, 
and those depending on this trade have been made to 
suffer. Correspondingly the European demand for 
domestic products has decreased, and those dependent 
on such sales have been compelled to retrench. 

As the citizens of a state prosper, so prospers the 
state, and as they suffer economically, so suffers the 
state. Thus the treasuries of governments have be- 
come impoverished, and, in order to replenish them, 
foreign loans have been resorted to and additional taxes 
have been levied, all of which add to the weight which 
the already overburdened business man is compelled 
to bear. 

THE A. B. C. REPUBLICS 

In the short space of time allotted to me, it would 
be impossible to discuss in detail all the effects of the 
war on these countries. Witness the decline of the 
export and import trade in the three countries known 
diplomatically as the A. B. C. Republics, namely, Ar- 
gentine, Brazil and Chile. 

Before proceeding, I should call your attention to 
the fact that the statistics for this year are not yet 
available and that my comparison will be made between 
the years 1913 and 1914. Also, it should be borne in 
mind that the war began in August, 1914, and that the 
figures which I give would tell a still different story 
if it had started in January of that year. 



A 



The Argentine gold peso is worth 97 cents in United 
States money. In 1913, the Argentine Republic im- 
ported goods of the value of 421,000,000 pesos In 
1914, these figures fell to 271,000,000 pesos, or a total 
loss of approximately 35 per cent. In 1913, her exports 
amounted to 483,000,000 pesos, which were lowered in 
1914 to 349,000,000 pesos, or a total loss of about 28 
per cent. 

As the milreis paper currency of Brazil has a vary- 
mg rate, it would perhaps be better to quote her trade 
in pounds sterling. While in 1913 Brazil imported 
goods worth £67,000,000, in 1914 this amount was low- 
ered to £35,000,000, or a total loss of about 48 per cent. 
On the other hand, her exports fell from £64,000 000 
m 1913 to £46,000,000 in 1914, or a total loss of ap- 
proximately 28 per cent. 

The Chilean gold peso is worth 35i/o cents in United 
States money. In 1913 the import trade of Chile 
amounted to 329,000,000 pesos; in 1914 it fell to 269,- 
000,000 pesos, or a distinct loss of about 30 per cent. 
In 1913, her exports amounted to 391,000,000 pesos- 
m 1914 they fell to the sum of 294,000,000 pesos, or a 
loss of about 25 per cent. 

These figures show clearly the great trade loss which 
these countries have suffered by reason of the Euro- 
pean war. They do not, however, show the resultant 
evils which have followed, namely, industrial depres- 
sion, reduction of private incomes, diminution of pub- 
lic revenue, and placing of governmental loans and 
taxes. But these have come, and all as the result of 
the war. The sufferers have been innocent neutrals 
having nothing to do directly or indirectly with the 
instigation, beginning, or continuation of the war, but, 
nevertheless, made to bear the burden of many of its 
consequent evils. 



THE ''BUG'' COUNTRIES 

Since the joint conferences held recently concerning 
Mexico between the Secretary of State and the Diplo- 
matic Representatives of the A. B. C. Powers, Bolivia, 
Uruguay, and Guatemala, the last three named coun- 
tries have become popularly known as the ''Bug" 
countries, the name being formed by placing together 
the initial letters of the three words. These three 
nations have been affected by the war. 

Like most Latin-American countries, Bolivia ob- 
tains her public revenues from export and import 
duties. As tin and rubber are the principal articles 
of export, and as the exportation of each has almost 
ceased since the war began, the Government has found 
it necessary to retrench in every possible way. This 
has been accomplished by stopping public utilities 
work, by reducing the salaries of all government offi- 
cials 30 per cent, and by suspending all legations ex- 
cept those in the United States and South America. It 
supplemented its revenues by adopting a stamp tax, 
decreed moratoria, and, as the price of foodstuffs 
began to ascend, imported large quantities of flour. 

Shortly after the war began, Uruguay enacted a law 
providing temporary banking regulations in order to 
prevent the withdrawal of deposits from private banks 
and the conversion of bills at the Bank of the Republic. 
Among other things, this law provided that the Bank 
of the Republic was authorized to abstain from con- 
verting its bills for a period of six months, which was 
later extended to a period of three months after the 
termination of the European war; that private banks 
could make use of their gold reserves by depositing 
the same in the Bank of the Republic up to $4,000,000 
and receiving its bills in exchange; that there would 
be a postponement for a period of two months for the 




fulfillment of judgments for public sales in all pro- 
ceedings, and of one month for the dispossession of 
those who delayed payments ; and that the exportation 
of gold was prohibited. 

In 1913, the total trade of Uruguay amounted to 
$100,000,000; in 1914 it fell to $89,000,000, or a loss of 
about 11 per cent. It purchased less iron and lumber 
because the erection of buildings decreased in impor- 
tance, and less machinery and steel because its indus- 
tries did not increase their volume of production. In 
1914 it bought goods from the United States of the 
value of $5,000,000, or almost $2,000,000 less than in 
1913. For example, the purchase of iron and steel, ma- 
chinery and implements decreased from $1,500,000 in 
1913 to less than $1,000,000 in 1914; unfinished and fin- 
ished lumber from $1,000,000 to $850,000 ; vehicles and 
their parts from $551,000 to $423,000 ; implements and 
agricultural machinery from $491,000 to $278,000 ; sisal 
grass and twine from $213,000 to $105,000; rosin and 
turpentine from $260,000 to $130,000; iron and steel 
wire from $88,000 to $55,000, and manufactured cotton 
from $146,000 to $102,000. 

As soon as war was declared, the custom house re- 
ceipts began to fall. From July, 1913, to March, 1914, 
the total receipts amounted to $20,000,000. During 
the corresponding period of the following year they 
amounted to $16,000,000, or a loss of about 20 per cent. 

In September, 1914, a law was passed authorizing 
the floating of an internal loan of $4,000,000, part of 
which was intended to meet the decrease in the current 
expenses of the budget. To take care of the interest on 
this loan, taxes were imposed on the export of live 
stock and there was an increase in the inheritance tax 
and in that on wine. 

In order to provide for new general revenues, new 
taxes were levied on spirits, cigars, cigarettes and to- 



bacco. To meet pressing budget requirements, an 
additional internal loan of $6,000,000 was sanctioned. 
Interest on this loan is met by means of a 5 per cent 
duty on general imports, including foodstuffs, articles 
imported free of duty, and those which are not taxed 
higher than 8 per cent. 

The public revenues of Guatemala, which consist 
largely of duties on imports and an export duty on 
coffee, were affected by reason of the reduction in the 
foreign trade. The import duty on many necessities 
was reduced and that on flour was abolished. Steps 
were taken to keep down the ordinary expenditures 
of the Government by means of economy in adminis- 
tration and by limiting the expenditures for public 
buildings and public works. At the same time the 
Government increased its expenditures by purchasing 
flour to be supplied to the poorer classes below cost. 

Coffee is one of the principal products of Guatemala, 
the prosperity of the country being largely dependent 
on it. The principal market has been in Germany. 
The outbreak of the European war caused a reduction 
in the demand for this article and a consequent fall 
in price. 

While the external transactions of Guatemala are 
carried on in gold and the duties in part are imposed 
on a gold basis, yet the actual currency of the country 
is paper, consisting of notes of six banks of issue, the 
value of which has varied from about 50 per cent ten 
years ago to about 5 per cent today of its face value in 
gold. Needless to say, when war was declared, ex- 
change increased and the rate fluctuated, causing 
thereby additional financial losses. 

THE THREE C.'S OF THE CARIBBEAN 

The war has also affected the three C. 's of the Car- 
ibbean, namely, Colombia, Costa Rica and Cuba. 



In the past the Republic of Colombia has depended 
principally upon European credit for financing her 
foreign trade. Therefore, when the declaration of war 
in Europe was followed by the temporary interrup- 
tion of these credit facilities, by the demands for the 
repayment of loans, and by the declaration of mora- 
toria in Europe and in some of the countries of South 
America, there was considerable dislocation of the 
course of trade. 

The largest resources of the Government come from 
the custom houses, which yield about 75 per cent of 
the total yearly revenues. Customs duties are only 
charged on foreign merchandise, since the export tax 
is so small on the two or three Colombian products 
liable to duty that it cannot be taken into account. 
When the European war broke out, trade with Ger- 
many practically came to an end, and commerce with 
England and France was greatly limited ; consequently 
the national revenues decreased and have continued 
to ( do so, to the point that the Government felt com- 
pelled to pass two decrees in order to reduce expenses, 
one being issued October 20, 1914, for $2,257,000, and 
the other February 6, 1915, for $3,575,000. 

A banking house of Europe had submitted to Co- 
lombia two plans, one to establish a central bank for 
deposits and discounts, with the right of issuing bank 
notes and with a capital of $5,000,000, and the other 
to create a mortgage bank with a capital of a like 
amount. The terms under which these two banks were 
to start business were widely discussed, and the bank- 
ers, after considering the principal objections made 
to the original proposal, changed these terms for 
others more favorable to the Government. The pro- 
jects so modified formed the bases for the bills that 
were to be submitted to the July session of Congress 



8 

in 1914. But the European war put a stop to both 
projects. 

The Government had entered into contracts with 
English corporations for the survey of the principal 
ports on the Pacific as well as on the Atlantic Ocean 
in order to enlarge and equip them. Surveys were 
made for public works to cost several million pounds, 
and even a contract was signed for works to cost 
£3,000,000 in one of the ports. But the European war 
left these contracts in abeyance. 

Some time in 1913, several European Construction 
Companies, backed up by French, English, and Ger- 
man banks, planned to submit to the Government a 
project for the construction of all the railway lines in 
prospect, furnishing the necessary capital, as well as 
European engineers and the equipment required, in 
order to work and manage the lines until the time when 
the Government should decide to buy them. The Bal- 
kan war prevented the syndicate from going ahead 
with the plan; then the European war broke out, and 
it was found impossible to renew it. 

It is thus seen that foreign capital was ready to 
enter Colombia, and that had it not been for the Euro- 
pean war, strong national and foreign banking insti- 
tutions would have been established and the country 
would at present be making rapid financial and eco- 
nomic progress. 

In Costa Eica there was a reduction of 60 per cent in 
the customs revenues on imports during the first three 
months of this year. During the same period, the 
income from all sources amounted to 1,500,000 colones, 
as compared with 2,400,000 colones for the corre- 
sponding period of 1914. 

While the normal rate of exchange on New York is 
115 per cent, the war caused it to go as high as 185 per 
cent ; that is to say, while in normal times it takes 2.15 



colones to buy a dollar, the high rate caused by the war 
requires 2.85 colones. The situation thus created 
caused a lack of exchange on the United States, thereby 
bringing about a paralysis in the transactions in the 
markets of the country, and tending further to reduce 
governmental revenues. 

Although Costa Rica is on a gold standard, the Gov- 
ernment was forced to suspend the law of paper con- 
version, which provided that the bank-note issues of 
the country must be redeemed in gold. It was imprac- 
ticable to maintain the operation of the law for the 
reason that the country would have been depleted of 
gold if the law had not been suspended, and the banks 
would have been jeopardized. 

The breaking out of the war would have had a 
disastrous effect on the trade of Cuba with foreign 
countries, if it had not been that the absence of the 
competitive sugars of European countries in the 
world's market advanced the prices of Cuban sugars 
to a considerable degree in comparison with those of 
the two previous years ; and this has in some measure 
made up for losses in other branches of trade which 
have been brought about by the European conflict. 

As the Pearl of the Antilles depends for the largest 
portion of her expenditures on the receipts obtained 
through the customs, and as the latter have been 
affected by the war, the Government, by introducing 
economies in administration, has curtailed the expendi- 
tures wherever it has been possible to do so. 

EFFECTS IN SOME OTHER REPUBLICS 

Republics other than the ^'A. B. C." the ''Bug" and 
the ''three C.*s" have suffered. 

The revenues of the Dominican Republic, for exam- 
ple, have been greatly lowered by the war. This is 
largely due to the fact that the only market for tobacco, 



10 

its principal product, has been in Germany. Therefore, 
since the beginning of the war, the merchants of that 
country have kept their crop in storage, and have thus 
been deprived of the means of buying what they for- 
merly secured with their tobacco. This has resulted in 
depriving the Government of the import duties on 
goods so bought. 

Although the war reduced the revenues of the coun- 
try, no new methods of increasing them were adopted. 
The Government contented itself with reducing ex- 
penditures and with doing away with such outlays as 
were not absolutely necessary. 

Prior to the outbreak of the war, German vessels 
constituted 30 per cent of all the tonnage that arrived 
at Dominican ports. On account of the scarcity of ships 
of other nationalities, there has been a lack of means 
for ocean transportation. 

In this connection, it may be stated that the requisi- 
tioning of merchant ships by belligerent governments 
and the general effect of the war have reduced the 
amount of available shipping in South America and 
caused an increase in ocean-carrying rates. But the 
same is not true in regard to the countries of Central 
America, whose trade is well taken care of by United 
Fruit Company ships, which are adequate in number, 
efficient in service, and whose rates of transportation 
are the same at the present time as before the out- 
break of the war. 

Before the war began, the fiscal revenues of Ecuador 
amounted to about $10,000,000, American gold, made 
up partly of internal revenue, but chiefly of customs 
duties. The decrease in the importations on account 
of the war lowered the revenues about $2,000,000, so 
that it is estimated that the total income will aggregate 
about $8,000,000, or an annual loss of about 20 per cent. 
The only measures adopted to meet the conditions 



11 

caused by the war were the borrowing of money by the 
Government from one of the local banks and the tem- 
porary suspension of gold exports and of the conver- 
sion of notes. 

The monetary system of Nicaragua is based on a 
gold standard. The monetary unit, the "cordoba," is 
worth a dollar. To maintain the cordoba at par with 
the American dollar, there is a ''conversion fund" in 
the United States and Europe against which drafts 
are drawn. When the war broke out, a panic ensued, 
and the selling of drafts was suspended in order to 
prevent the exhaustion of the fund. Then exchange 
went up, the rate reaching the maximum of 25 per cent 
premium, that is to say, it took 125 Nicaraguan cordo- 
bas to buy $100 American gold. Foreign credit was 
stopped, and to prevent the failure of the principal 
firms, the Government was forced by public demand 
to declare a moratorium. 

The revenue of Nicaragua is small. It decreased 
notably when the war broke out. With so small an 
income, the Government could not continue to pay its 
current expenses. This circumstance resulted in Con- 
gress enacting a proprietary tax to be in force for 
only two years. But this was not enough to meet the 
entire situation, and it was, therefore, found necessary 
to reduce the national budget to half its former 
amount. In order to carry on the public administra- 
tion with so decreased a revenue, the Government 
entered into contracts with its foreign creditors, sus- 
pending the payment of the principal and interest of 
its foreign normal debts. 

While the revenues of the Republic of Panama have 
decreased 30 per cent since July, 1914, it is only fair to 
say that, although the decline is largely due to the 
Europeon war, it is also partly caused by the establish- 
ment of commissaries by the Government of the United 



12 

States in the Canal Zone. Meantime, the expenses of 
the Government have increased above the normal 
amount, due to the extraordinary expense in connec- 
tion with the building of a railroad and the establish- 
ment of an Exposition to commemorate the opening 
of the Canal and the discovery of the Pacific by Balboa. 
To meet the situation thus created, the expenses of 
governmental administration have been greatly re- 
duced under the direction of its able President. 

CONCLUSION 

Thus we have seen some of the effects of the war on 
the countries of Central and South America. I have 
not pretended to enumerate all the effects in the 
countries mentioned, because all of the statistics for 
last year and this year are not yet available. Nor have 
I spoken of the effects in Haiti, Honduras, Mexico, 
Paraguay, Peru, Salvador, and Venezuela, for the 
reason that all of these countries have in different 
degrees been similarly affected. 

The statistics which I have given do not show by 
any means all the injuries. The mind of the economist 
can easily analyze and the brain of the business man 
can readily grasp the commercial effects of this war 
on Latin America. Panics have ensued, industrial 
depressions have followed, commercial failures have 
resulted, and all as the result of a far-distant war 
to which the sufferers are not parties. 

Those of you who are engaged in business and inter- 
ested in commercial gain can readily understand the 
injurious economic effects I have described. All of 
you appreciate the horror of war, the suffering in 
battle, and the loss of life that goes with it. Although 
you are interested in the termination of such strife, I 
am confident that when the unholiness of war is 



13 

brought closer to your doors in the shape of reduction 
of demand for your products, lowering of prices on 
your goods, and the consequent reduction of revenues 
and that when you are forced to pay increased taxes to 
provide funds for a treasury depleted by reason of 
war, then, and then only, can you behold fully its evils. 

If two men are found fighting in the street, society 
demands that they immediately cease and the state, 
acting through the strong arm of the law, seizes them, 
conveys them to prison, if need be, to prevent their 
continuing to injure each other, and administers such 
punishment as will create an example to others who 
are about to enter into combat. It may be that in the 
course of the fight an innocent by-stander is injured or 
the property of a nearby owner is destroyed. If so, 
then society gives them the right to sue for damages 
suffered and to enjoin, if need be, their further com- 
mitment. 

The civilized world is a society. If several of its 
members become embroiled in a dispute, they have no 
inherent right to cause suffering and injury to innocent 
neutrals. Such international conduct is neither ethical 
nor lawful. Why should not neutrals be able to say : 

' * You have fought long enough. You have no right 
to continue injuring us. It is true we can sue you 
for certain injuries you are committing against us — the 
unlawful seizure and illegal condemnation of non-con- 
traband goods, the prohibition to export and import 
from certain neutral countries, the wanton destruction 
of life by submarines — for all these injuries we may 
ultimately secure pecuniary awards, but you can never 
compensate us for the untold distress, undisclosed 
miseries, and innumerable sufferings you have 
caused." 

When this most lamentable war has closed and the 
day of the opening of the next International Peace 



14 

Congress has arrived, let us hope that some plan may 
be proposed, to which all civilized nations will adhere, 
whereby in case of the prospect of war or of an actual 
war between two countries, the other members of the 
world society may take such corresponding steps to 
control or restrain the belligerents from further un- 
friendly action as the members of a state take in con- 
trolling or restraining two belligerent individuals from 
further combat. Thus only will innocent neutral states 
be assured that in the future they will not be made to 
suffer the ill effects of a war to which they are not a. 
party and for the existence of which they are not 
responsible. 



NATIONAL CAPITAL PRESS, WASHINGTON, O. C 



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